CSC shoulders NHS loss by moving jobs offshore

CSC UK said last week it was cutting costs in the UK by moving jobs offshore, after posting a loss of nearly £1bn.

It also revealed declining profits at its flagship, 10-year outsource
with Royal Mail, which Computer Weekly revealed recently had avoided
paying tax by front-loading contract costs.

Directors said the UK group's profits would show a hit again next year, when it publishes results for the financial period about to end in March 2013.

Those numbers would be marred by the cost of restructuring this year to cushion the NHS loss, in addition to measures taken as part of a turnaround plan instigated last summer by Mike Lawrie, who has been shaking things up at the troubled supplier since he joined last March.

Wiped off

The UK group posted a loss of £929m for the year ended 30 March 2012. This hole matched the £953m it wrote-off after the collapse of its £2.9bn NHS contract last year. But even without this mishap, its income would have been perilously flat.

The NHS write-off wiped out the balance of work in progress at CSC UK almost entirely. It amounted to 99.6 per cent of work in progress at at the group company, CSC Computer Sciences Limited.

The company had begun remedial restructuring even before the end of March 2012, said CSC UK director Andrew Thompson in the report.

The restructuring would "increase use of lower-cost offshore resources", he said. This had involved 655 job cuts in the year to April 2013, a redundancy bill of £41m and other restructuring charges of £13.9m. The highest paid UK director received £530,000 in fiscal 2012.

Guy Hains, CSC director who had overseen the NHS programme since its inception in 2003 but was due to leave at the end of December, said last April CSC had redeployed or discharged 30 per cent of staff working on the NHS contract. This was intended to cut costs, he said, but they were staff who would have been moved anyway because their work on the project was complete.

More to follow

CSC warned of further hits on its profits due to restructuring this year. It denied one analyst report that most of its major contacts - including including UK Visas, UK Atomic Energy Agency and Network Rail - were due to terminate in 2012. Royal Mail was due to terminate in 2013, but had been extended.

"We absolutely have a good story to tell on the year ahead," said a CSC spokeswoman. CSC did score a major contract win for its 2013 period, a £303m to run veterans payments for the Ministry of Defence.

Kable Research has reported that 60 per cent of the UK's public sector IT budget was held by the two big departments of state: DWP and HMRC, and most of their spend was tied up with IBM, HP and Capgemini under long term contracts.

Most public spend was now in local government, where there was much backoffice and IT that is theoretically now earmarked for outsourcing to the likes of CSC. But it was also where CSC had suffered a knock on its reputation through work in the defence sector that had linked it to the US Central Intelligence Agency's illegal "rendition" of people from European countries in the "War on Terror". CSC's links to "torture flights" had become a factor in its bid for work in Cornwall recently. CSC pulled out of bidding at the last moment, leaving the work to BT.

Torture

Lawrie's turnaround plan involved cutting under-performing contracts. It has cut £16m of profit off two unnamed contracts. The implication was that they were either under-performing and this had not been reflected in CSC's numbers, or they had been overstated in the first place. The accounts did not give an explanation.

CSC is still subject of a fraud investigation by the financial regulator that includes its UK business - and until it defunkt, had also implicated its NHS contract. The UK accounts made no mention of irregularities.

The contract readjustments would be shown in the next set of accounts, but had been dragged up from three years ago.

"The future losses on onerous contracts arose from the restructuring exercise completed during the financial year period ending 28 March 2008," said the 2012 accounts.

Royal Mail

The accounts meanwhile marked as "principle risks" both its remaining most major contracts - its recast contracts with Royal Mail and the NHS. It could only now book revenue on these contracts once it delivered the goods. If its costs turned out to be higher than anticipated it could not pass them on to the customer. It would have to swallow them.

It's Royal Mail contract had already seen gross profit plunge 31 per cent between fiscal 2011 and 2012. It booked 8 per cent less business with Royal Mail in the year to 30 March 2012, in separate accounts published for CSC Business Systems Limited, the unit it acquired from Royal Mail in 2003.

CSC didn't manage to cut costs in the Royal Mail unit as quickly as its sales dropped this year, with the accounts showing costs down only 5 per cent. It has lost lost £2.89m over the life of the contract to date, according to Computer Weekly's analysis of the unit's annual accounts since 2003.

Computer Weekly recently demonstrated how CSC had claimed tax breaks on the Royal Mail contract by loading losses to the front of the contract. To date, after nearly the full 10 year term, it has claimed tax credits of amounting to 3.8 per cent of its £1.6bn turnover. The payment of charges between CSC subsidiaries is hidden under UK rules. It may be impossible to determine how much of CSC's Royal Mail income was paid to other CSC companies as costs, and how these payments would have been justified, before it calculated its tax obligations.

The Royal Mail deal was due to expire in May 2013. Royal Mail has been unable to provide details of its public contract with CSC. Details of the extension are apparently unavailable either on contractual database of the Official Journal of the European Union, the official record of public contracts.